After evaluating the credit score and financial ratios of an application, a lender will proceed to look at a borrower’s net asset value, and what amount of that value could be considered as being actually tangible.
Unfortunately, it is during this part of the application process that many customers will become offended by the lender’s assumptions of value, because of the way in which best practice lending will assign arbitrary values of worth to a borrower’s assets. By understanding how it is that tangible value is measured as part of a loan application, and how it is that value can be improved, a borrower is not only able to understand their own net worth, but improve their ability to plan for debts.
Tangible value essentially represents the worth of all assets controlled by a borrower that can be used as collateral for lending purposes. Cash, new vehicles, and homes are the most obvious examples of assets that have a very strong tangible value. However, consumers are sometimes confused when they find that a very valuable asset of theirs is not recorded by their lender as having any tangible value. These assets are said to have a high intangible value, because they cannot be used as collateral. Assets with intangible value include vintage cars (ie. Over 7 years old), art collections, and insurance policies without cash surrender values.
When describing the difference between tangible and intangible value to clients, I choose to use the example of a vintage car (mainly because it is a surprisingly common). While a collector may be able to sell a vintage car for $400,000, it is important to recognize how it is that the market for such a vehicle is particularly small. This means that, in order to sell the vintage car at its full value, a great deal of time and expertise must be applied towards setting up a private auction, and attracting wealthy bidders.
Because the bank itself is not likely able to handle such a transaction on its own, it is unable to sell the car at its full value within a reasonable timeframe. However, the bank would very likely be able to sell the vehicle for a reduced price, because of the way in which the vehicle itself still serves a practical purpose. As such, the bank would likely value the vintage car at its practical value as a mode of transportation, and ignore the additional hundreds of thousands of dollars that people place on the value of aesthetics, and asset as a collector’s item.
While differentiating between tangible and intangible assets may seem to be a trivial pursuit to a borrower at the time of application, but it is important to recognize just how great an impact this difference can make. If a borrower qualifies for a loan upon the condition that they can prove their income and net asset value, they may be surprised to realize that they are not able to qualify for the loan once their vintage car and jewellery collection are removed from the equation due to their intangible values. Since the bank cannot attach a realizable price to the assets, they will simply discount them from the equation, and move forward on the evaluation from there.
This means that the consumer’s ability to qualify for the loan may depend entirely their ability to prove the tangible value of their assets, or to actually sell the assets themselves. However, in the event of discount, there are still options available for a borrower to pursue, some of which will be discussed in the following article.
